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3 Stocks to Play the Mississippi Lime

These three companies are focused on the up-and-coming Midwest oil and gas play.

Most people know about the Bakken, one of the most prolific oil shale plays ever discovered in North America. But fewer people know about the Mississippi Lime. It's certainly harder to spell, but it's also a lot easier and less expensive to drill. And the potential reserves underlying this vast play are huge. In fact, a number of companies are banking on it.

A primer on the Mississippi LimeThe Mississippi Lime formation, which spans across Northern Oklahoma into southwestern Kansas, has got the energy industry buzzing. Tom Ward, CEO of SandRidge Energy(NYSE: SD), thinks output from the formation will soar to more than 18 million barrels a month by the end of the decade, up more than fivefold from current levels of around 3.5 million barrels a month.

According to Ward, "Peak production in the Mississippian Lime will be around 500,000 barrels of oil before 2020." This level of output would rival that of the Bakken. While it's true that the Mississippian is a much gassier play than the Bakken, it has some major advantages over unconventional plays.

First, it offers abundant reserves at a fraction of the cost. Since it's a much shallower play, the costs to drill and complete a well are significantly lower than those in the Bakken or the Eagle Ford. Moreover, with so many companies focusing on deeper unconventional plays, the equipment required to drill in the Mississippian is less complex and in ample supply.

Now let's check out three of the most promising players with operations in the Mississippian.

Range ResourcesFirst up is Texas-based Range Resources(NYSE: RRC). It's a natural-gas-focused producer with a commanding position in Pennsylvania's Marcellus Shale, a natural gas-rich play where it controls 1.1 million acres. According to the company, its long-term strategy has been -- and continues to be -- one of "per-share growth at low cost, coupled with building and high grading our inventory."

The company has dedicated the bulk of its capital budget this year to its two projects with the highest rate of return: the southwestern Marcellus and the horizontal Mississippi Lime. So far, Range is reporting great progress in the Mississippian, where it controls 152,000 net acres.

The reason I like Range is that not only does it stand to benefit tremendously from a natural-gas rebound, but it's also a low-cost producer that can endure a prolonged period of low gas prices. And while it's still very gas-heavy compared to peers, I think it has significant liquids potential.

However, at its current price of more than $64 per share, the company looks relatively expensive on both a price-to-cash-flow and a price-to-book-value basis. Ultra Petroleum(NYSE: UPL) and Southwestern Energy(NYSE: SWN) -- also low-cost, gas-focused producers -- look much cheaper. But Range is definitely a solid name to keep on your watchlist, and one I would strongly consider buying in the event of a pullback.

SandRidge EnergyNext up is SandRidge Energy, a small-cap producer with a massive acreage position in the Mississippian. Currently, the company controls 1.7 million net acres in the play, with around 8,000 potential net drilling locations. It expects 300 million to 500 million barrels of oil equivalent per well, which sounds even more appealing with the cost per well at $3.2 million -- roughly half that of the average Bakken well.

And production is booming. In late May, SandRidge hit a company record when it reported a whopping 30,558 barrels of oil equivalent per day. For this year, the company has 380 horizontal wells planned in the Mississippian and is expecting these to drive double-digit oil growth.

Still, there are a few negatives. The company is highly leveraged, and its capital expenditures continue to exceed cash flow. While part of its three-year plan is to get capex funded within cash flow by the end of 2014, there are good reasons to be skeptical. However, I think SandRidge has a good shot at pulling it off.

Another huge reason to be bullish on this company is simply the possibility that it could be majorly undervalued. In my opinion, its enterprise value doesn't even come close to reflecting the long-term value of its Mississippian, Permian, and Gulf Coast assets and its Texan gas field. With shares trading at just under $7, this is an energy company worth serious consideration.

Devon Energy and final thoughtsI like what I'm seeing from SandRidge and Range so far, but my favorite company with significant exposure to the Mississippian would probably have to be Devon Energy(NYSE: DVN). In my opinion, it's a safer pick than SandRidge and probably even Range. As Fool analyst Paul Chi points out, Devon offers a balanced production mix, a shareholder-friendly management team, and a strong balance sheet. It also has a large portfolio of attractive assets and a deep inventory of repeatable drilling opportunities.

While Devon, SandRidge and Range are all well-hedged, falling oil and natural-gas prices still pose a major risk. But there is one oil and gas company that has found a way to profit regardless of price fluctuations. Read more about this little-known energy equipment provider that's ready to soar in The Motley Fool's special free report: "The Only Energy Stock You'll Ever Need." Don't miss out on a limited-time opportunity to discover the name of this under-the-radar company. Click here to access your report -- it's totally free.